The Tax Battalion

Get your check in the mail today! Charitable contributions are deductible in the year made, make you feel good immediately, and may give you some IRS Tax Relief in April. Therefore, donations paid by check still count for tax 2012 as long as they are mailed by today, the last day of 2012. Donations charged to a credit card before the end of 2012 count for 2012, even if the credit card bill isn’t paid until year 2013.

To deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Bank records include canceled checks, bank or credit union statements, and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.

To be deductible, clothing and household items donated to a charity generally must be in good used condition or better. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with the return. Household items include furniture, furnishings, electronics, appliances and linens.

But remember, only donations to qualified organizations are tax-deductible. A searchable online database listing most organizations that are qualified to receive deductible contributions is available here on IRS.gov. Additionally, churches, synagogues, temples, mosques and government agencies are usually eligible to receive deductible donations, even if they are not listed in the database.

The health care coverage mandates under the Affordable Care Act are scheduled for January 1, 2014. So what will it mean for individuals? There are penalties and “carrots” associated with the looming health care changes.

Starting in 2014 if your employer doesn’t offer insurance, you will be able to buy it directly from an affordable insurance exchange. An “exchange” is a supposedly transparent and competitive insurance marketplace where individuals and small businesses can buy affordable and qualified health benefit plans. Exchanges will offer a choice of health plans that meet certain benefit and cost standards.

As an individual who needs health care, in addition to the incentives offered by your employer if you are employed, there are incentives for you to obtain adequate health insurance. Beginning in January 2014, insurance companies will be prohibited from refusing to sell coverage or renew policies based pre-existing conditions or from charging higher rates based on gender or health status. Additionally, depending on your income, advanceable tax credits will be available on qualified insurance coverage. The advanceable tax credit will lower your monthly premium payments so that you will not have to wait for the tax season to arrive to realize the benefit. This is the carrot.

Here’s the penalty: unless you meet the criteria for an exemption, you’re going to pay Uncle Sam if you don’t have health insurance. This is the “individual mandate.” The imposed fee is intended to help offset the costs of caring for uninsured Americans. Exemptions from the individual mandate for obtaining health insurance include religious reasons or where the least expensive health insurance policy available exceeds 8% of income. Unpaid fees may result in IRS tax problems since the IRS will be charged with collection.

If you don’t meet the criteria for an exemption, and you choose to not obtain health insurance, you will pay Uncle Sam nonetheless. The amount is tiered year to year beginning in tax year 2014. For year 2014, if you don’t have qualified health coverage, the minimum fee will be the greater of 1% of your annual income or a flat amount of $95. In tax year 2016, this penalty will increase to the greater of 2.5% of your annual income or a flat amount ranging from $695 to $2,085, depending on your household size. After year 2016, the penalty will be increased annually by the cost-of-living adjustment.

The health care coverage mandates under the Affordable Care Act are scheduled for January 1, 2014. So what will it mean for business owners?

The small business health care tax credit is the carrot for small business owners to contribute to their employee’s health care. Beginning in 2014, Uncle Sam’s carrot for small businesses that pay at least half of their employee premiums for qualified health insurance coverage, and employ 25 or fewer workers with an average income of $50,000 or less, is a tax subsidy on the health insurance premiums they pay.

The maximum qualified subsidy is 50% and is available to small businesses with an average payroll for full-time equivalent employees of $25,000 and ten or less full time employees. The subsidy is presently scheduled to be reduced by 3.35% per additional employee and 2% per additional $1,000 of average income.

Therefore, the savvy small business owner, who is doing good by contributing to their employee’s health insurance will be able reduce their expenses by paying careful attention to their workforce and wages paid. It may be necessary to consult with an experienced CPA or tax attorney for a more individualized understanding of these tax incentives.

A Memphis woman has recently been sentenced to 22 years in prison and ordered to pay nearly $700,000 in restitution after her tax fraud scheme was shut down by IRS Criminal Investigation.

Aundria Bryant-Branch, 38, was providing stolen social security numbers and other sensitive data to third party tax return filers. The information was obtained from the Memphis Police Department. The news stories do not identify Bryant-Branch as a former employee of the Memphis Police Department, but it seem clear that she was either an employee or a contractor/vendor who would have had access to the confidential info.

The other parties involved in this scheme were responsible for filing the false tax returns and bilking the federal government out of thousands of dollars during the period 2006-2008.

Capital gain tax rates are likely to increase in 2013. Accepting your taxable gains now, instead of after January 1, 2013, may mean more profit and less taxes.

Capital Gain Tax Rates:

Depending on your tax bracket, some households may be able to seize the opportunity to earn capital gains tax free! However, the question of whether you should liquidate your investments now, instead of in the next year or two, in order to capitalize on lower tax rates, really depends on your short-term needs versus your long-term goals. In regards to investments, taxes should be a secondary consideration, not a primary consideration for investment strategies.

Paying attention to Washington D.C. will be important in these final days of 2012 to ensure that you have the right strategy in place for tax year 2013. These tax tips are very broad and you should consult with a tax attorney, certified public accountant, or other qualified tax professional that is familiar with your individual circumstances before making any tax planning decisions.

If you itemize your medical deductions, your qualified medical expenses in tax year 2012 are more valuable and deductible than those incurred in tax year 2013. Medical deductions will be more difficult to claim as itemized medical deductions in tax year 2013.

Specifically, for medical expenses to be claimed for tax year 2012, your qualified medical expenses must exceed 7.5% of your adjusted gross income before they can be claimed as an itemized deduction. In tax year 2013, your qualified medical expenses must be more than 10% of your adjusted gross income. Therefore, accelerating your out of pocket qualified medical expenses before December 31, 2012, may ensure that you meet the criteria for this year’s itemized deduction that you may otherwise be ineligible for in tax year 2013.

You want all the deductions you can get because that translates in to lower taxes and helps you to avoid tax problems. If you’ve done all you can to minimize your tax bill and you still can’t pay it, call Montgomery & Wetenkamp at (800) 454-7043 to get help from an experienced tax attorney.

‘Tis the season for holiday cheer … and last minute tax planning. Bah humbug! With the tax year about to end, tax season will officially begin; it’s finally the time to ensure that you will not need to hire a tax relief attorney in April 2013.

My usual end of the year advice includes comparing your prior year tax returns with your present year income, tax withholdings, financial transactions, and withdrawals to determine whether you need to make late December moves to ensure you don’t owe a tax debt. This usually includes ensuring that you properly withheld taxes on your income throughout the year and/or made your estimated tax payments, and invested accordingly. While this advice is still sound, as of the date of writing of this article, if things in Washington D.C. remain the same, my advice also includes, earn it now if you can.

Being mindful to not illegally manipulate your income, i.e. you earn your income when you have a right to receive the income; accelerate your income in 2012, if you can. Since your tax rate may increase beginning January 1, 2013, the money you earn now is worth more now than it will be in just a few weeks because your tax rate is likely to increase. Likewise, self-employed individuals who have the ability to time the payment of deductible expenses may want to defer those expenses for tax year 2013, because those expenses will be more valuable in tax year 2013 than in tax year 2012.

Our most recent celebrity tax problem story features hip hop artist Fat Joe, best known for his 2001 hit “What’s Luv” which sampled Tina Turner’s “What’s Love Got to do With It.” No doubt Mr. Joe was at the top of his game back in 2001 and his stardom has been fading ever since. I only bring this up because he fits a familiar pattern: celebrities who get in trouble with the IRS tend to be those whose popularity (and earning power) is on a downward trend. Most of the time it has to do with the difficulty of adjusting one’s lifestyle to match the changes in income. Celebrities (just like anybody) have a hard time with this.

Fat Joe does not have a typical tax relief case. He’s being accused of a tax crime: failure to file returns for years 2007-2010. Right now he is a free man after posting $250,000 bail, but who knows if his tax attorney will be able to keep him out of jail. If you’re familiar with this blog, then you know where Fat Joe went wrong; he violated the cardinal rule: “Always file your taxes every year, even if you know you’re going to owe and can’t pay it.”

The Alternative Minimum Tax (AMT) was written into the tax code in 1969, its purpose being to prevent wealthy Americans from completely avoiding income taxes through crafty tax planning strategies. The AMT was meant to ensure that those who have the means to contribute to the public coffers do not get undeserved tax relief. But the AMT income threshhold that was established back in 1969 did not account for inflation. The only reason the middle class normally avoids having to pay an AMT is because each year Congress puts together temporary legislation that raises the threshhold.

Except Congress hasn’t done so this year. And according to IRS management, their systems will not be able to process tax returns until they get this yearly AMT patch that they are accustomed to getting each year. They could begin to reprogram their computers now, but it appears that they are waiting until January 1, 2013 to see if lawmakers can agree on a permanent fix.

A mad scramble in January would mean delays; delays in processing returns and delays in paying out tax refunds. Acting commissioner, Steven Miller, says that the consequence would be that taxpayers would temporarily be unable to file, but I think what he means is that the returns would not be processed.

Maybe I’m not tech savvy enough to understand, but when the IRS announces that their Centralized Authorization File system (CAF) will be down for “routine maintenance,” I tend to imagine them dusting, mopping and shredding. Actually, this planned outage is something that happens every year at the end of December.

CAF is responsible for processing Power of Attorney forms. A tax attorney or other tax professional is not permitted access to a taxpayer account without an active POA. CAF will be down from December 26, 2012 through January 2, 2013 so no new POA forms will be received or processed in that office until after January 2nd. However, a taxpayer account can still be accessed by faxing a POA form directly to the service center of the IRS representative you are working with.

Of course, “routine maintenance” is just a code word; we all know what is really going on this time of year. IRS personnel are decorating their cubicles, playing Secret Santa, and throwing office parties.

Attorney Advertisement. Tax Attorneys Montgomery & Wetenkamp are licensed by the State Bar of California, are licensed attorneys authorized to practice before the United States Tax Court, and may practice before the Internal Revenue Service (IRS) as attorneys in all 50 states. Sacramento Tax Attorneys and Modesto Tax Attorneys Montgomery & Wetenkamp perform all services in Sacramento, California and Modesto, California. The content of this website is for informational purposes only and does not constitute legal advice. The tax information contained on this website, is not intended to be used, and cannot be used, referred to or relied upon, for the purpose of avoiding tax-related penalties under the Internal Revenue Code or promoting, marketing, or recommending to another party any tax-related transaction or matter addressed herein. Past successes cannot be an assurance of future successes because each case must be decided on its own merits and will differ if based on different facts. Full disclaimer provided on our disclaimer page and is incorporated herein by reference.

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